Trump and Abe Chart Diplomatic Path After Two-Day Summit

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Japan breathed a sigh of relief on Sunday after Prime Minister Shinzo Abe concluded a successful two-day summit with U.S. President Donald Trump, who left protectionist rhetoric off the table as the leaders played golf and forged a strategic partnership.

In his first official visit to the United States after the November 8 U.S. election, Prime Minister Abe charted a new diplomatic path with Trump, who has struck a decidedly protectionist tone in his first four weeks in the White House. Media outlets described Abe’s efforts as “strategic patience” at a time when Japan needed all the partners it could get to stimulate economic growth, promote free trade and safeguard national security.

Both leaders held a press conference at the Mar-a-Lago club in Florida on Saturday, where Abe condemned North Korea ballistic missile program. Trump vowed continued support for Japan.
“The United States of America stands behind Japan, its great ally, 100%,” Trump said during the press conference.

Trump later told reporters that Washington is “committed to the security of Japan and all areas under its administrative control.”

Prior to his visit, Abe received a lot of flack from Japanese media for his apparent eagerness to befriend Trump, who has lashed out against allies and foes alike on topics related to trade and currency manipulation. Trump’s administration is no doubt watching the latest depreciation in the Japanese yen, which helped the sluggish economy eke out narrow growth in the final quarter of 2016.

Japan’s gross domestic product (GDP) expanded just 0.2% on the quarter, government data confirmed earlier this week. That translated into a year-over-year gain of just 1%. External demand, a calculation of exports minus imports, contributed 0.2 percentage points to the growth. The gains were driven by a 2.6% gain in exports, the fastest expansion in two years. During the quarter, the U.S. dollar rebounded above 118 yen. Just months prior, it was trading below 100 yen.

However, it was difficult to be optimistic about Japan’s economic performance. Not only did private consumption – the bedrock of the Japanese economy – fail to grow, the risk of U.S. protectionism also clouded the outlook on the world’s third-largest economy.

Trump kept the chatter on trade to a minimum this weekend, although the writing is already on the wall. Since coming to power on January 20, Trump has signed numerous executive orders seemingly shifting the course on U.S. policy across several fronts, including trade. With the stroke of a pen, Trump withdrew his country from the Trans-Pacific Partnership (TPP), a multilateral trade deal involving Japan, the U.S. and ten other countries. Abe was a major supporter of TPP, which appears dead in the water after Trump’s executive decision.

On the topic of trade between the United States and Japan, Trump said any deal must be “free, fair and reciprocal.”

The U.S. President’s behaviour this weekend demonstrated a diplomatic side we’ve rarely seen since inauguration day. After all, it wasn’t long ago that Trump was accusing Japan and other nations of taking advantage of the U.S. on various trade and business deals. The focus this weekend was clearly on maintaining strong diplomatic ties between two major economies.

Japan and the United States are clearly on very different trajectories in terms of economic growth. Japan has spent several decades fighting deflation, and appears no closer to achieving its goal as when Abe first came to power in 2012. The Prime Minister’s “Abenomics” program, which is centred on “three arrows” of fiscal stimulus, monetary easing and structural reforms, has had mixed results.

Meanwhile, Trump is inheriting a U.S. economy that is in better shape, but still faces systemic imbalances such as below-target inflation, low workforce participation and a shrinking manufacturing sector. However, the economy’s performance has been strong enough to warrant multiple rate hikes by the Federal Reserve since 2015.

Trump has promised to accelerate growth through a combination of fiscal stimulus, deregulation and corporate tax cuts. This promise has lifted U.S. stocks to record highs. Check out US Indicies on the easyMarkets platform.

Despite the pleasant exchange over the weekend, Trump’s diplomatic path remains as unpredictable as ever. That is unlikely to change as the business mogul-turned-president seeks to “Make America Great Again.”

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